Sanctuary CIO Corner The Fed Reaction - Sanctuary Wealth
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
SANCTUARY
CIO CORNER
A WORD FROM
JEFF KILBURG
SANCTUARY ASSET MANAGEMENT
Halftime 2021
The Fed Reaction
A Historic Year
Sanctuary CIO Corner
As markets continue to make new highs, investors have largely
benefited
A word fromthanks to the accelerated reopening of the U.S.
Jeff Kilburg
economy in the first half of 2021. In the first quarter of 2020,
the COVID-19 pandemic hit U.S. shores, resulting in a 1929-like
depression. Yet, within less than a year, a spending boom
reminiscent of the World War II wartime boost has injected
confidence and resources into the economy.
SANCTUARY
CIO CORNER
A WORD FROM
JEFF KILBURG
Amid tremendous uncertainty, we witnessed companies drastically reduce
operations during the early stages of the pandemic. This created new paths to
profitability that were highlighted in both Q1 and Q2 2021 earnings reports.
After the U.S. government pressed pause on nearly the entire domestic
economy, we swiftly experienced historic monetary and fiscal stimulus to assist
the economy and marketplace during the pandemic. Despite the recovery
being somewhat dislocated across the country, the U.S. economy and markets
quickly found footing and equities have established new all-time highs
domestically as the second quarter closes.
Assests in Review
Selected asset performance, 2021 year-to-date and range
Brent Crude
European Equities
U.S. Equities
EM Equities
Global High Yield
U.S. Dollar Index
Hard-Currency EM Debt
Italian 10-year BTP
Global Corporate IG
German 10-year Bund 2021 Range
U.S. 10-year Treasury Year-to-date
Gold
-20% -10% 0% 10% 20% 30% 40% 50%
Total Return
Past performance is not a reliable indicator of current and future results. Indexes are unmanaged and do not account for fees. It is not possible to invest
directly in an index. Sources: BlackRock Investment Institute, with data from Refinitive Datastream as of June 17, 2021. Notes: The two ends of the bars show
the lowest and the highest returns at any point this year to date, and the dots represent the current year-to-date returns. Emerging market (EM), high yield
and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are, in descending
order: Brent Crude, MSCI Europe Index, MSCI USA Index, MSCI Emerging Markets Index, Bank of America Merrill Lynch Global High Yield Index, ICE U.S.
Dollar Index (DXY), spot gold, J.P. Morgan EMBI Index, Refinitiv Datastream Italy 10-year benchmark government bond index, Bank of America Merrill Lynch
Global Broad Corporate Index, Refinitiv Datastream Germany 10-year benchmark government bond index and Refinitiv Datastream U.S. 10-year benchmark
government bond index.
SANCTUARY
CIO CORNER
A WORD FROM
JEFF KILBURG
Looking Ahead
The question as we head toward the second half Specific to Fed policy, the Fed has been trying
of the year is whether the recovery is sustainable. to establish inflation. Surpassing $8T on its
The reboot of the U.S. economy is unequivocally balance sheet in the month of June, it continues
outpacing expectations. The Fed has repeatedly to put the pedal to the metal on its policies.
revised its growth estimates for U.S. gross Formally, the Fed has shifted its reaction function
domestic product (GDP) upwards over the past associated with both its mandates—inflation and
12 months to considerably higher than original employment—from being “outlook” based to
estimates. GDP is expected to surpass pre-COVID “outcome” based. In essence, the Fed has moved
levels this year, rather than taking several years the proverbial goalposts and in doing so, will
as initially expected. Let’s dig into the data to most likely achieve its inflationary goals. However,
attempt to better understand. there is overarching risk that the markets may
view otherwise.
In the Q2 of 2020, GDP shrank by -31.4% on a
quarter-over-quarter annualized rate. That was We recently endured the market’s inflationary
followed by an eye-popping initial rebound of concerns as the 10-year note nearly tested the
+33.4% in the Q3 of 2020, then more moderate 2% level in Q2 2021 in a feverish manner. It has
growth of +4.3% in the fourth quarter of 2020 and since settled back to being tethered to 1.5%,
+6.4% in the first quarter of 2021. causing the inflation alarmists to head back to
the sideline for now.
Growth in the Q2 of 2021 is expected to jump to
+9.4% as the economy further reopens, according To make things even more challenging for
to Bloomberg’s tracking of economists’ estimates. investors to gauge inflation, there are multiple
These consensus estimates suggest Q2 2021 measuring sticks to lean into:
will be followed by steadily descending, but still
positive, growth rates for the back half of 2021. • Consumer Price Index (CPI): CPI is a measure of
the average change in the prices paid by urban
Looking ahead to the second half of 2021, I remain consumers for a market basket of consumer
constructive on equity markets yet, there are some goods and services. Data is sourced by collecting
significant market risks to consider. Possible risks data from 75 urban areas throughout the
include the potential peak earnings growth rates, country and from about 23,000 retail and
higher inflation, Fed policy and the developing service establishments. Data on rents are
undertones of mixed investor sentiment. collected from about 50,000 landlords or
tenants. This index effects more than 80mm
people because of adjusting income payments
for Social Security, union beneficiaries, Federal
civil service and SNAP, the food stamp program,
recipients. (As of May 2021, CPI has gone up
5.0% over the last 12 months, not seasonally
adjusted. With the biggest changes coming to
Energy up 28.5% and used cars/trucks up 29.7%
https://www.bls.gov/news.release/cpi.nr0.htm.)
sanctuarywealth.com
SANCTUARY
CIO CORNER
A WORD FROM
JEFF KILBURG
• Producer Price Index (PPI): This program With large cap blended growth and value offering
measures the average change over time in potential opportunities, I prefer to take risk in
the selling prices received by domestic equities focused on owning essential blue-chip
producers for their output. The prices included names, cyclical and industrials, and I believe in
in the PPI are from the first commercial having selective and deliberate exposure to S&P
transaction for many products and some 500 sector and sub-sectors. With a range bound
services. https://www.bls.gov/ppi/home.htm U.S. Dollar Index between 90-94, I also favor
exposure to international equities.
• U.S. Personal Consumption Expenditure Core
Price Index (PCE): PCE tracks overall price We absolutely must anticipate bouts of market
changes for goods and services purchased by volatility as markets will test the Fed’s resolve to
consumers in the United States. This captures deliberately stay “behind the curve” on inflation.
inflation (or deflation) across a wider range of However, welcome any pullbacks in equity
consumer expenses and reflects changes in markets that will most likely push the VIX back up
consumer behavior. It is published by the BEA towards 30 as they should be shallow and swiftly
(Bureau of Economic Analysis) not the BLS met with buyers as nearly $5T remains in cash
(Bureau of Labor Statistics) as the other Indexes poised for a dip. The historic large cash balances
are. Read more at https://www.barrons.com/ held by investors provides additional confidence.
articles/inflation-is-in-the-cpi-of-the-beholder-
the-feds-favored-gauge-pce-explains-its-policy- Please feel free to reach out to myself, Rich
stance-51622228401 Williams and the entire S.A.M. team as we seek
to be assistive to you by incorporating a more
thoughtful, active and dynamic approach to the
marketplace for the back half of 2021, which
Closing Out should provide an opportunity to harness alpha.
I also welcome any rebalancing or weighting
In conclusion, I am constructive on equities questions in client portfolios that you may have.
all the while expecting some volatility in the
back half of 2021, as Fed policy continues to be Please reach out to review and discuss
measured, deciphered and scrutinized. either virtually or in-person by emailing me
My conviction is predicated upon the belief that at jkilburg@sanctuarywealth.com or calling
the Fed’s recently augmented “outlook” will +1 (312) 782-6996.
not translate into significantly higher rates any
time soon. This, combined with the powerful Best,
restart of our economy, should provide a green
light for investors.
Jeff Kilburg
Chief Investment Officer
Office: +1 (312) 782-6996
2 N. LaSalle Street, Suite 1010, Chicago, IL 60602
jkilburg@sanctuarywealth.com
Sanctuary makes no representation as to the accuracy or completeness of information contained herein. The information is based upon data available to the
public and is not an offer to sell or solicitation of offers to buy any securities mentioned herein. Any investment discussed may not be suitable for all investors.
Investors must make their own decisions based on their specific investment objectives and financial circumstances. Investments are subject to risk, including
but not limited to market and interest rate fluctuations. Any perfomance daa reosesnts oast peromancs whcih is no guarantee of futures resukts. Prices.
yields/figures mentioend herin are as of the date noted unless indicated othersise. All figure subject to market fluctuation and chance Additonal information
available upon request.
sanctuarywealth.com
Securities offered through Sanctuary Securities, Member FINRA and SIPC.
Advisory services offered through Sanctuary Advisors, LLC, an SEC registered investment advisor.
You can also read
